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Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering Policies

Tomas Williams (), Pablo Slutzky and Mauricio Villamizar-Villegas ()
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Pablo Slutzky: University of Maryland

Working Papers from The George Washington University, Institute for International Economic Policy

Abstract: We explore how anti-money laundering (AML) policies affect banks and credit provision to firms. For identification we exploit the enactment of a financial regulation in Colombia. Aimed at controlling the flow of money from drug trafficking into the financial system, we find that after implementation bank deposits in municipalities with high drug trafficking decline. This negative liquidity shock has consequences for credit in other municipalities. Banks sourcing their deposits from areas with high drug trafficking cut lending relative to other banks. Using a proprietary database containing data on bank-firm credit relationships, we show that small firms that rely on credit from affected banks experience a negative shock to sales, investment, and profitability. Furthermore, we use night-lights data to show that these results are not due to a reallocation of activity across firms nor between the formal and informal sectors. Our evidence uncovers a hidden to be considered when implementing AML policies.

Keywords: money laundering; organized crime; financial system; bank lending; liquidity; economic growth (search for similar items in EconPapers)
JEL-codes: I15 O15 Q12 K42 G18 G21 (search for similar items in EconPapers)
Date: 2019-05, Revised 2020-05
New Economics Papers: this item is included in nep-ban, nep-dev and nep-fdg
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Downloads: (external link) First version, 2019 (application/pdf) ... P2019-5-Revised1.pdf Revised version, 2020 (application/pdf)

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